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Chapter 12: Q. 7 (page 278)

Assume that the multiplier in a country is equal to 4and that autonomous real consumption spending is\(1trillion. If current real GDP is\)18trillion, what is the current value of real consumption spending?

Short Answer

Expert verified

The true cost of spending is trillions of 14.5dollars.

Step by step solution

01

Calculation for consumption function 

The consumption function that is assumed is indicated by,

C=c+bY

where the self-directed spendingcis $1trillion.

Because the multiplier is4,

So,

4=11-MPC

4=11-b

b=0.75

Consumption function C=1+0.75Y
02

Calculation of real value

If the current rate of growth in real GDP is maintained as$18trillion,

The current real value of consumer spending is:

C=1+0.75Y

C=1+0.75脳18

C=14.5

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Most popular questions from this chapter

Consider the table below when answering the following questions. For this hypothetical economy, the marginal propensity to save is constant at all levels of real GDP, and investment spending is autonomous. There is no government.

a. Complete the table. What is the marginal propensity to save? What is the marginal propensity to consume?

b. Draw a graph of the consumption function. Then add the investment function to obtain C+I.

c. Under the graph of C+I, draw another graph showing the saving and investment curves. Note that the C+Icurve crosses the 45-degree reference line in the upper graph at the same level of realGDPwhere the saving and investment curves cross in the lower graph. (If not, redraw your graphs.) What is this level of real GDP?

d. What is the numerical value of the multiplier?

e. What is equilibrium real GDPwithout investment? What is the multiplier effect from the inclusion of investment?

f. What is the average propensity to consume at equilibrium real GDP?

g. If autonomous investment declines from \(400to \)200, what happens to equilibrium real GDP?

The multiplier in a country is equal to5, and households pay no taxes. At the current equilibrium real GDP of \(14trillion, total real consumption spending by households is \)12trillion. What is real autonomous consumption in this country?

Consider movements from points F to K in both panels of Figure 12-1. Use the resulting changes in planned real consumption and saving corresponding to the change in real disposable income to calculate the marginal propensities to consume and to save.

Take a look at Figure 12-5. If current real GDP for this nation's economy is $13 trillion per year, what are the values of planned real investment and actual real investment? What is the amount of the unplanned inventory change, and why does this fact imply that real GDP must change? To what new level will real GDP adjust?

Consider the current equilibrium real GDP level of \( 18.0 trillion displayed in Table 12-2. Based on your answer to Problem 4, if real government spending were to decrease by \)1.0 trillion, what would be the resulting change in real GDP? What would be the new equilibrium level of real GDP? Verify that at the new level of government spending, this new equilibrium real GDP equals C+I+G+NX.
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